•  The impact of Covid-19 on the economy became clearer in February with the release of the National Economic Report, in which the Ministry of Finance estimated that gross domestic product fell 8.5 per cent last year. The number of jobs on the island, according to preliminary data from the Employment Survey, also fell by 8.5 per cent, with layoffs taken into account. The spike in new infections in April, and the added restrictions on everyday life that have followed, have put more strain on already struggling sectors.
• As promised, finance minister Curtis Dickinson imposed no tax increases on businesses in his 2021-22 Budget. He also extended payroll tax relief for an extra year to troubled sectors, including hotels and restaurants, while the zero rate of Customs duty on materials for the renovation of retail stores also remained. The Government projects a budget deficit of $124.7 million, while the Ministry of Finance expects the economy to regain some lost ground with 3.5 per cent growth through the fiscal year.
• One of the few bright spots in the Bermuda economy is retail. Last December, retailers’ most important month of the year in the run-up to Christmas, local stores took $16 million more at the till than they did in pre-pandemic 2019. According to the Retail Sales Index report, this represented a 14.2 per cent increase, even after inflation was taken into account. This remarkable finish to the year represented a sixth successive month of increases in retail sales volume. The streak continued in January, which saw a 5.8 per cent increase. Local retailers not dependent on the tourist trade may be benefiting from the lack of travel, with fewer residents away at any given time and unspent vacation budgets being outlaid on other things.
• The biggest ongoing external story for Bermuda is the plan for a global minimum tax rate. The years-long effort by the Organisation for Economic Cooperation and Development to overhaul the global tax system has received added impetus from the new Biden administration in the United States, which has expressed backing for the plan. Janet Yellen, the US Treasury Secretary, said in April that there had been a “30-year race to the bottom” on national tax rates. With indebted governments seeking to stimulate their pandemic-ravaged economies, they are hungry for more revenue and urgency to enact the plan has grown. The idea is that multinational companies would pay a yet-to-be-determined minimum rate of tax on all their profits, regardless of where in the world they booked them, thus reducing the attractiveness of low-tax jurisdictions like Bermuda. The G20 finance ministers, after meeting in April, said they were hopeful of sealing an agreement on the minimum tax rate in July this year. The repercussions could be significant for Bermuda’s international business sector. What looks likely is that the island faces a future in which it will be competing more on other factors besides the tax advantage.

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Bermuda’s re/insurance market is going through a growth spurt. Close to $20 billion has poured into the sector, creating new companies and bolstering the capacity of many incumbents. Bermuda has seen nothing like it since the aftermath of hurricanes Katrina, Rita and Wilma 15 years ago.

The arrival of the Class of 2020-21 could not come at a better time for the island, with many parts of the local economy having been hit hard by the pandemic and the island facing the prospect of its tax advantage being all but eliminated by G20-backed plans for a global minimum tax rate for corporations.

The start-ups are bringing jobs, growing the market and expressing a vote of confidence in Bermuda as the “world’s risk capital”. They have also invigorated Bermuda, sharpening competition and bringing new business models with innovative technology at their core, not to mention pristine balance sheets unencumbered by legacy issues.Behind the influx is a combination of factors that has driven up prices of property and casualty insurance in a world where risk exposures are growing and new risks are emerging.

John Huff, chief executive officer of the Association of Bermuda Insurers and Reinsurers, said: “The unfolding world of uncertainties, brought on by the existential threats of the day including future pandemic, increased frequency and severity of natural disasters driven by climate change, growing cyber-risk from the technological necessities of the pandemic, and signs of social inflation, is real.

“Additionally, as societies struggle with the issues of equity and economic disparities, these challenges have created a new appreciation for the global re/insurance industry.”At the same time, interest rates remain at historically low levels, limiting the income insurers can make from their huge investment portfolios and increasing the emphasis on profitable underwriting. Ever since Ace and XL were launched in the mid-1980s in response to the liability insurance crisis, periodic waves of new companies have set up on the island after market dislocations caused by events such as major catastrophe years and the 9/11 terrorist attacks in 2001.

Mr Huff welcomes the influx of start-ups. He said the island’s continuing attractiveness to investors “confirms that Bermuda is still a great place to start and grow a well-regulated global re/insurance company”.

Three of the Class of 2020-21 – Conduit Re, Canopius Re and Mosaic – joined Abir in March, taking the body’s membership to 29 companies, the highest level in its 28-year history.

“Bermuda has shown once again that it is the place to deploy capital against risk in a manner that is effective and efficient, with speed-to-market motivation and innovation while meeting the future needs for next-generation risk transfer products,” Mr Huff said. The international recognition of the BMA, the financial-services regulator, is also an attraction. In particular, Mr Huff cited EU Solvency II equivalence, first achieved in 2016 and maintained since, and its Reciprocal Jurisdiction status from the US National Association of Insurance Commissioners in the US.

Mr Huff added that Bermuda’s cluster of industry talent and expertise added to the island’s appeal. He said: “Over the past several months, the global re/insurance sector has seen a renewed capital infusion not seen since 2005/2006. Bermuda talent — in the form of new start-up firms and legacy powerhouses — has caught the eye of global investors.”

Among the new re/insurers to set up in the past year are Conduit Re, Vantage Risk and Mosaic. Others, such as Canopius Re and Ark, have upgraded existing operations – both transitioned from Class 3 to Class 4 reinsurers, giving them a greater scope for writing third-party business. The market has also seen one new $3 billion reinsurer, SiriusPoint, created from the merger of two existing companies, Third Point Re and Sirius International.

The capital the newcomers have brought in has been more than matched by existing companies, who have ramped up their capacity to capitalise on favourable market conditions. For example, RenaissanceRe, Arch Capital and Fidelis have each raised at least $1 billion in either equity or debt. Ariel Re, Hiscox and Lancashire, among others, have brought in hundreds of millions of dollars more. Another, Convex Group, the 2019 $1.7 billion start-up led by Stephen Catlin and Paul Brand, has raised an additional $1.5 billion in recent months.

The arrival of new managing general agents, notably Helix Underwriting Partners and Arcadian Risk, is adding extra dynamism and reach to the market. In April, Helix launched an excess casualty platform in a long-term agency agreement with Watford Re, to add to the middle market property insurance platform it launched in 2020. Arcadian is targeting general and professional liability lines of business, writing on the paper of its investor Third Point Re.

The market is undergoing not only growth, but also disruptive innovation. New entrants are leading the long overdue modernisation of the industry. Vantage and Convex are designed to be lean operations, utilising technology to streamline back-office operations and harness data to an extent that incumbents using legacy technology may struggle to match.

Mosaic, a new global specialty insurer that operates Lloyd’s Syndicate 1609, is starting up with a hi-tech platform developed in partnership with an insurtech firm. Its hybrid model involves taking a lead line of the business it writes through its Lloyd’s operation and syndicating the remaining risk globally.

At the same time, the island’s life reinsurance industry has continued to expand, both through mergers and acquisition activity and large investments of private-equity capital. In terms of total assets, the long-term sector’s roughly half-trillion-dollar base makes it the largest segment of the Bermuda re/insurance market.

As demand grows from an ageing global population for products that guarantee retirement income in a low-interest-rate environment, Bermudian-based companies like Athene have undergone a rapid expansion.

In L&G Re, the island can also boast a world-leading innovator in pension risk transfer (PRT), a market that involves the transfer of pension funds and obligations from corporations to a re/insurer. L&G Re’s “estua-re”, launched in 2019, is the first PRT platform driven by blockchain technology.

The legacy, or run-off business is also growing steadily and, as with life reinsurance, experts within its ranks speak of great scope for further expansion. Companies like Enstar Group, Catalina Holdings and Randall & Quilter Investment are giving Bermuda a slice of that pie.

Even the captive insurance industry, the decades-old foundation of the island’s re/insurance sector, sees opportunities, as corporations faced with the hardening commercial insurance market explore opportunities to self-insure on a greater scope and scale.

For Bermuda’s re/insurance market, one could argue that the prospects have rarely looked better.

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Introduction

A corporation cannot enter into a contract if it does not have the legal capacity to do so.  The doctrine of “ultra vires”, with its Latin rubric, might perhaps be regarded as antiquated, and as mere “legalese”, but in Bermuda at least (and in many other parts of the Commonwealth) it can have wide ranging and severe commercial consequences, in particular in relation to persons dealing with statutory corporations. Such corporations include, in Bermuda, the Bermuda Gaming Commission, the Bermuda Monetary Authority, the Bermuda Tourism Authority, WEDCO, BDLC, BHC, the Hospitals Board and the Corporation of Hamilton.  The decisions of the Supreme Court and the Court of Appeal in the MIF litigation (Corporation of Hamilton v Mexico Infrastructure Finance LLC [2016] Bda LR 110 and Mexico Infrastructure Finance LLC v Corporation of Hamilton [2017] CA (BDA) 11 Civ, (2017) 90 WIR 232) serve as a poignant reminder of the fact that innocent third parties must take special care when dealing with statutory bodies.

The doctrine

The literal translation of “ultra vires” is “beyond the powers”.  In the context of a corporation whose powers are conferred by statute, it means that the corporation only has the powers expressed in the statute, as well as any other powers which may necessarily be implied from the terms of the statute, or which may be expressed or necessarily implied from other statutes.  The question is therefore one of interpretation, a process which can be complex.

Having determined that the statutory corporation has the requisite power, it is then necessary to determine whether the power has been exercised in a proper manner and for proper purposes, as a power not so exercised is equally ultra vires.

Broadly speaking, acts and omissions of statutory corporations which involve illegality, irrationality or procedural impropriety are treated as ultra vires.  Thus, if the corporation takes some action or decision for a purpose which is not one authorised by the statute in question; or takes a decision involving an error of reasoning depriving it of its logical integrity; or is guilty of unfairness, bias or the appearance of impropriety, the action or decision taken will be ultra vires. It is also ultra viresstatutory powers to act in bad faith, to ignore something legally relevant, to take into account something legally irrelevant, or to act in accordance with some rigid policy rule, or under the dictation of some other person or authority.  The range of potential errors which could render an action or decision ultra viresis considerable.

The consequences

If a statutory corporation purports to exercise a power which it does not have, or exercises a power which it does have unlawfully, the exercise of the power is ultra vires, with the result that it is void and of no legal effect whatsoever.  A contractual transaction which is ultra viresis therefore of no legal effect; and neither contracting party can enforce it or sue for damages for breach.  Further, the corporation can escape contractual liability entirely by raising its own ultra viresas a defence to an action based on the contract.  This is so even despite the passage of time, or the corporation acquiescing in the performance of the contract by the other side, or encouraging the other side to perform, or making representations that it had the power to enter into or perform the contract, or attempting to later ratify the contract, or delaying in raising the defence.  It is even so if the corporation accedes to a consent order of the court consenting to a judgment given against it on the contract and even if the corporation seeks to take the point some considerable time afterwards.

These principles, create an obvious risk, both legal and commercial, for those doing business with such corporations.  An innocent third party who has entered into a contract with a statutory corporation in good faith may find itself unable to sue to enforce the bargain if the transaction entered into with the corporation was outside the corporation’s powers.  This is even the case where the risk may not have been discoverable easily or at all.  Further, to make things more difficult, the innocent third party cannot rely on its own ignorance of the limitations of the corporation’s powers.  Nor would a warranty in the contract to the effect that the corporation had the relevant power assist, as that too would be equally ultra vires.

The doctrine (as interpreted by the Courts) renders the due diligence exercise, in short, something of a minefield. Finding, reading and correctly interpreting the governing statute (as well as any other applicable statutes), as difficult as that may be, is not be sufficient.  The innocent third party also need to be in a position to assess the rationality and procedural propriety of the decision to make the contract.  That involves making a judgment on such matters as: whether all relevant factors had been taken into account and all irrelevant ones excluded from consideration; or whether or not the corporation may be acting in bad faith, for example, in order to make some sort of unauthorized profit rather than to further its statutory purposes.

From the perspective of legal policy, this seems an odd position for the law to adopt.  The notion that the enforceability of statutory corporations’ contracts should be subject to the ultra viresdoctrine with these results has been described as “harmful and irrational”. Commentators have further pointed to the potential impact of the ultra viresrisk on commercial decisions in relation to entering into contracts with public corporations and the possible consequence that, in order to compensate for this risk, businesses contracting with public corporations may increase prices, thus leading to the undesirable consequence of increasing the cost of public contracting.

On the other hand, it has been argued that the ultra viresdoctrine, despite its apparently troublesome consequences, is justifiable on the basis that it upholds, supports and promotes the rule of law, which is possibly the most important of constitutional and political values.  The rule of law in this context means that the corporation must act in accordance with the law as enacted or framed by the legislature and with the constitution.  This is a fundamental constitutional principle, the purpose of which is to protect individual citizens from illegal action by the government.  In relation to municipalities, this rationale (it has been said) is further buttressed by the related doctrine that municipalities owe their ratepayers a duty in the nature of a fiduciary duty in relation to the use to which they put their rates.  To permit a municipality to use rates otherwise than for statutorily authorised purposes would be a breach of this duty; and for the council of a municipality not to raise the ultra viresdefence to an action for monetary recovery on a contract in order to protect ratepayers’ funds would likely similarly be a breach of duty.

Thus, although applying the consequence of absolute invalidity or voidness may be a particularly strict approach, it has the advantage of being an unambiguous declaration by the courts of their concern to protect the rule of law, constitutional principle and ultimately, individual citizens from illegal action by the government. Accordingly, it is said, this strict approach is justifiable.  Public accountability, it is asserted, ought to outweigh commercial convenience, especially given that the ultra viresrisk is a known one and can be addressed by careful legal advice, which then passes the risk on; as does transaction insurance, which is also an available option.

The MIF litigation

Facts

The facts of the MIF litigation and the legal arguments made perfectly illustrate the various policy issues arising from these competing approaches.  Successive Councils of the Corporation of Hamilton thought that it would be a good idea to promote the development of a St. Regis hotel in the city of Hamilton.  The Corporation therefore took the view that it should assist a private company, Par-la-Ville Hotel and Residences Estates Limited (“PLV”), to do so.  The eventual mechanism for such assistance was the provision of a secured guarantee by the Corporation of a bridging loan of $18 million to PLV from Mexico Infrastructure Finance LLC (“MIF”).  The security for the guarantee was a mortgage on the retained freehold interest of the development land leased to PLV pursuant to a development and lease agreement between the Corporation and PLV.  The purpose of the loan was not to fund the development project itself, but to put PLV in funds to discharge certain debts by way of anticipated expenses to be incurred in securing the equity and senior lending that would fund the development project.

The Government of the day supported the development project, proposing and ensuring the passage of motions in both Houses of the Legislature approving the issuance of the guarantee and the guarantee and mortgage documents themselves, and granting the requisite Ministerial permissions under the companies and immigration legislation, as well as under the Municipalities Act 1923.  In addition, as there had been some disquiet as to the Corporation’s capacity to issue the guarantee, the Government sought to dispel it by procuring the enactment of the Municipalities Amendment Act 2013, which contained provisions thought to address that issue.

PLV defaulted on the loan and, having issued a demand for the entire balance in December 2014, MIF accordingly sought to enforce the Corporation’s guarantee.  MIF applied for summary judgment and acting on advice that there was no defence, the Corporation acceded to a consent order, which was granted in May 2015.  Having obtained fresh legal advice, the Corporation commenced proceedings in late June 2016, over a year later, seeking to set aside the consent order, on the ground that it had no power to provide the guarantee, which it accordingly asserted to be null, void and of no effect, and the further ground that it therefore had no power to consent to its enforcement.

Law

Both the Supreme Court and the Court of Appeal agreed that the Corporation had to exercise its power to enter into a contract of guarantee in a manner that was consistent with the statutory purposes, and that the Municipalities Act 1923 properly construed in relation to the facts of the case meant that the Corporation had to act for municipal purposes.  The Court went on to say that this involved provision of services to ratepayers as part of the Corporation’s function of the local government of the City of Hamilton.  The purpose of the guarantee was to facilitate a hotel development by a commercial developer and this purpose was held not to involve the provision of services to ratepayers and therefore not to be a municipal purpose.  Accordingly, the Court found, in giving or purporting to give the guarantee, the Corporation had acted ultra viresits powers.

This was so despite the fact that successive Councils of the Corporation, as well as the Government of the day, supported the development project because it was thought it would benefit the City and Bermuda as a whole; despite the Corporation consenting to a judgment against it, having not at the time raised the ultra viresdefence; and despite the passage of time since the consent judgment had been entered.

On this point, it was argued that, given the ultra viresdefence was available at the time of the consent judgment, it ought to have been raised, and for that reason to subsequently attempt to raise it as a ground for setting aside the order was an abuse of process of the Court.  The Court of Appeal, however, held that the abuse of process rule was displaced by the ultra viresdoctrine.  The Court of Appeal followed the logic of the ultra viresdoctrine to its ultimate conclusion, holding that the consequence was that the consent judgment (being ultra vires) could not be effective or binding in any way and accepting that in any event, in principle, such a consent judgment could not in law be an adjudication to which the abuse of process rule could attach.

Although the Court of Appeal did not need to apply the test for abuse to the facts, it agreed with the Supreme Court that there was no abuse.  The Court of Appeal emphasized that MIF had been made aware of the risk at an earlier stage of the transaction by the Corporation’s lawyers at the time, that the risks of transactions with entities such as the Corporation were well known in the marketplace, that MIF seemed to have relied on the advice of the Corporation’s attorneys rather than taking their own advice, that MIF’s attitude towards effecting recovery did not appear urgent, and that MIF were sophisticated lenders who had entered into the transaction voluntarily and with a view to profit.

There is an appeal to the Privy Council pending in relation to the question whether the guarantee was ultra viresthe Corporation’s powers, but there is no appeal in relation to the abuse issue, hence the decision of the Court of Appeal stands in relation to that issue.

The position now

The case re-affirms the relevance of the ultra viresdoctrine in the modern commercial context (on the particular facts, commercial lending to a municipality or public authority).  It demonstrates that the Bermuda court will apply not merely the simple version of the doctrine, involving an analysis of the relevant statutes in order to determine whether there is power to make a particular contract, but also the more far reaching principles, requiring that the third party ask and answer a wide range of additional questions, such as whether the particular corporation:

• has acted in good faith,
• reasonably and rationally,
• taking everything relevant into account and excluding from consideration everything irrelevant,
• for proper purposes,
• in accordance with relevant procedures, and
• has not permitted itself to slavishly follow a rigid a priori policy without proper consideration of the individual merits of the particular decision.

It also demonstrates the court’s commitment to fundamental constitutional principle and the rule of law, even in the face of competing commercial considerations.  The consequences of this approach will no doubt unfold as time goes by.  But what is clear is that, even if the impact on commercial dealings with public corporations turns out to be deleterious, given the court’s demonstrable commitment to the concept, legislative intervention will likely be necessary to deal with any perceived difficulties.  Bermuda may have to follow the UK in this regard.  In the meantime, those contracting with public corporations ought to take particular care that a proper and comprehensive process of due diligence is undertaken.  Time will tell whether the Privy Council agrees.

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